By Dennis Boone
What’s the link between hula hoops, Campbell’s soup, minivans, SUVs and three-car garages, and the pharmaceutical companies’ advertising assault on anyone who watches network TV news in 2014?
In 1964, they made up a third of the U.S. population, a demographic monster unlike any the nation had ever seen. Though their proportions of the population have changed—in part because of their own contributions with the Boomer Echo, otherwise known as Millennials—Boomers continue to hold sway in the nation’s economy. Because of their higher levels of education and greater realized earnings potential, and aided by an unprecedented wealth transfer from their parents, Boomers continue to be market makers. They may be giving up some of that ground to the Millennials who outnumber them, but decades of wealth accumulation still make the Boomers kings of consumer spending.
Among the markets they’re shaking up is the investment world. Boomers, according to the consulting firm Accenture, are sitting on roughly $15 trillion—yes, that’s with a “T”—in investable assets, and $30 trillion overall. As a group, they’re healthier than their predecessors, and will live longer lives—to an average of 83 for men and 85 for women—and many will be drawing on that wealth for more years in retirement. Further, those with substantial assets are more inclined to be philanthropic, with goals for leaving a legacy with favored causes.
But not all Boomers are created equal: Amid that vast wealth, which over the next 30 years will surpass the Greatest Generation’s feat of triggering the previous version of the world’s biggest wealth transfer, there are:
Factors like those and others make it difficult to paint a picture of Boomer investment needs and strategies without using an overly broad brush. But financial-services professionals and others dealing with seniors’ issues say some interesting patterns are beginning to emerge as roughly 20 percent of Boomers have passed the traditional retirement age of 65.
The good news? Congress hasn’t been enacting much in the way of new laws that deal with tax issues of greatest concern to Boomers. The bad news? It didn’t have to—tax matters approved in previous sessions have created sufficient concerns, particularly for wealthier investors.
“There are a couple of things I’m seeing my clients run into,” said Lynn Mayabb, managing director for BKD Wealth Advisors. “Look back at just the last three years and see what’s changed; the health-care law implementation and the tax structure has changed because of the 3.8 percent Medicare tax on high earners. That has impacted investment strategies.”
The Medicare surtax will apply to individuals, trusts and estates, with varying triggers: For individuals, it starts at the lesser of net investment income for the tax year, or modified adjusted gross income above $200,000 for single filers, $250,000 for those who are married filing jointly, and $125,000 for married people filing separately. For trusts and estates, the surtax kicks on the lesser of undistributed net investment income for the tax year, or adjusted gross incomes over the minimum-dollar amount for the highest tax bracket.
“For those with sufficient incomes, it’s ‘How can I minimize the impact of the 3.8 percent surtax and capital-gains taxes?’” Mayabb said. “They will be losing a significant amount of money due to those taxes if they can’t structure their portfolios correctly.”
As a result, she said, investors are more conscious of where they’re taking money from—whether it’s tax free, or from dividends, or how they can move more from an Individual Retirement Account and fit it into a lower bracket to avoid those thresholds. “They’re more focused on exactly where they are in the bracket during the year, when they’re trying to fund retirement,” Mayabb said.
Kevin Farrell, a financial adviser at Waddell & Reed, cited other challenges facing older investors—current market dynamics and recent history. Boomers have lived through a series of huge market downturns since 2000, starting with the dot-com bubble bursting (leading to 78 percent NASAQ decline), the aftermath of 9/11 (a 35.7 percent Dow decline) and the financial-sector near meltdown in 2008 (a 54.4 percent Dow decline).
Investors who gutted those times out were rewarded handsomely, including those who stayed involved with equities after the most recent downturn; despite a summer selloff, the Dow is still up 150 percent from its 2008 low. But, said Farrell, some who were spooked by that downturn missed out on the upswing. With the Dow at near historical point totals, they fear they have few places to turn to seek yields.
“There’s always a little bit of fear, where folks pull out and go to cash,” he said. “The market has rebounded quite nicely since the downturn of ’09, and for those that bailed then—well, it certainly was not good for them.”
The reality of yield shock—moving from an overextended position in equities into a more conservative environment with sharply reduced yields, “is definitely a consideration” for older investors, said Scott Holsopple, managing director of retirement solutions for the Mutual Fund Store. “But that’s the point about having a diversified portfolio, so you don’t have to shift suddenly from all stocks to all bonds or all cash.”
Diversification implies a more challenging investment environment, given where rates are today, Holsopple said. “But a lot of people who need to diversify have already benefitted from this bull market run. That’s where the power of diversification comes in, where one thing may be struggling, but the other side is doing well.”
One thing working in investors’ favor these days has been an explosion in investment vehicles. Much as the mutual fund democratized the ownership of corporate stock, we’ve seen a more robust selection of investments with the emergence of vehicles like real-estate investment trusts, master limited partnerships, closed-end funds and bond exchange traded funds.
The key, planners say, is constructing the plan. Without one, you’re not much better off than taking your chances at a casino in Vegas.
It sounds cliché, Farrell said, “but it’s absolutely true of a lot of clients we work with, we strive to put together a written financial plan, and as long as there’s a very clear understanding of what those objectives are, they are able to keep on track, regardless of what happens in the market.
“That’s the beauty of going through the planning process,” he said. “A lot of those clients need some nurturing, and that’s a powerful thing to be able to do, to keep them focused on their goals, rather than panicking.”
Which is probably easier in an environment like this, because there are few places to run to find yields. The Federal Reserve’s reductions of cash infusions into the economy portend higher interest rates, and with them, lower bond prices. That should compel even those investors spooked by the latest run-up to stick with equities, which financial advisers say should remain a part of any portfolio because they have the best potential for the long-term yields needed to support far longer retirements.
“We still have clients less invested because of what happened in ’08-’09,” said Mayabb. “They never got fully back in; they were already in a more cautious position. Now, we have clients asking ‘When is this bubble going to happen? The market has to go down 20 percent’ and there’s rumbling about maybe I should get totally out of stocks. They’re looking for some type of pullback, but want to get right back in.”
For older investors, such a strategy can prove disastrous because it is, essentially, an attempt at market timing—usually the worst approach to wealth accrual.
Boomers, say financial professionals, need to think not just about the target figure they want to have on hand the day they retire, but how their portfolio should be structured to get them through the next 20, 30, even 40 years. Younger retirees and longer life spans mean some will be in retirement longer than they were in the income-generating phase of their life.
“For most of our professional lives, we focus on saving and investing,” Holsopple said. “We don’t spend a ton of time thinking about what am I going to be doing in retirement itself. The misconception is that you stop being an investor. But 20 or 30 years is a long time, and you do have to think about investing differently, and managing your money differently throughout retirement. It surprises people, but just like you have to have a plan for retirement, you have to have a plan to live in retirement. That takes a mental shift.”
And one more thing people need to consider for its duration.
“That’s the million-dollar question: How long will retirement be?” said Farrell. “Going back to the Greatest Generation, it was a lot easier to plan for retirement because you could count on Social Security, and that good, old pension from a company you’d worked with for 30 years. Nowadays, you don’t see that as much.”
So the advisers are telling Boomers that, yes, Social Security may be there—in some form, likely reduced—but retirees need to figure out how to generate a 30-year income stream, and that program alone won’t get it done.
“That’s significant,” Farrell said of the time frames involved. “To get there, you have to put it into a written financial plan to show the client how that’s going to affect them long term, and how to live a comparable lifestyle to what they’ve had. Thirty years is a long time, especially for someone who doesn’t plan on doing anything else.”
In the final analysis, said Holsopple, it’s important for investors of any age, not just Boomers, to understand a three-bucket approach to investing: “There are needs, there are wants, and there are wishes,” he said. “Our job is to show them which they can realistically attain and which ones they can’t It’s important to know what you can’t get as it is what you can.”
When it comes to taking charge of one’s investments, some are pushing their retirement dreams in a new direction—backwards. They’re deferring the prospect of retirement by launching new ventures that allow them to build on expertise they’ve acquired in the corporate world, or start a company that turns a hobby into a revenue-generating enterprise. And in each case, the sense of control or feeling of fulfillment overwhelms the desire to check out at 65.
One company tapping into that is Guidant Financial, which works with investors to turn their 401(k) plans into small business capital, under a provision of the tax code known as ROBS, or Rollovers for Business Start-ups. To date, the company based in Belleview, Wash., says it has assisted more than 8,000 entrepreneurs, who have invested an aggregate of $3 billion worth of their retirement portfolios and, significantly, generating some 55,000 jobs.
More of that is on the way, says David Nilsson, Guidant’s CEO.
“The reason why this is seeing momentum has to do with a variety of factors,” he said. “When the markets melted down in 2008, it forced individuals to look at alternative ways of financing a small business. Credit was tight, unemployment was very high. People needed to identify other ways to become small-business owners.”
The trend has taken off in the past five years, turning a niche line into a company strength. “With the Boomers now, at an age where they have accumulated some assets, and the market being near an all-time high, those forces making it an environment friendly to rollover business startups.”
Jeff Driskill, a tail-end Baby Boomer, found himself unemployed at 51, and jumped at the chance to use his retirement fund to start Driskill Business Development Group, an affiliate of the sales-development organization Sandler Training.
“I wasn’t ready to retire; I wanted to continue working,” Driskill said. “It was a case where I had been in the corporate world, worked very hard for them, traveled a lot, did all the extra work.” And for his commitment, he was laid off after a merger. “I decided that while working that hard was fine, I wanted to work that hard and have the benefits for my family, as opposed to the corporation.”
When you’re in that position, and the retirement savings is the closest thing you have to a lifeboat, there are moments when one considers whether to risk it all for something bigger—especially on something that falls outside your comfort zone.
“I got hooked up with a business coach out of Tulsa, and she offered a lot of advice, but introduced me to the fact that there were business opportunities out there that I wasn’t even remotely aware of,” Driskill said. “We talked about franchising, like with McDonald’s or in the food industry, or something in the service industry like Merry Maids, or Service Pro. But I wasn’t aware that there were professional, white-collar kinds of franchises available.”
Those discussion led him to Guidant, and the establishment of his own consultancy.
“There were trepidations,” Driskill acknowledges. “But it was exciting from the perspective of working for myself and family, as opposed to a major corporation. I would be able to decide which clients I worked with, and how I work. As a W-2 employee, getting that regular paycheck every two weeks or month, not having that was a little intimidating. But it was an investment I saw as a calculated risk, because I was investing in myself.”
Rand Smith knows the feeling. Forced out of a job after more than 35 years in the optical-wear sector, both wholesale and retail, he and his wife used ROBS to open eyeSmith, in the Northland, two years ago. By focusing on higher end designer eyewear and hard-to-get specialty sports goggles—for activities like skiing or scuba diving—as well as services like putting prescription lenses into challenging frames, their company has reached a point where it’s time to start plans for hiring additional workers.
“At 56, I thought, where was I going to get another job at this age?” Smith said. “I could tap into the savings, throw it all out there: What’s the worst that could happen? Dig ditches in my old age? But it turned out to be the best thing I could have done. We were in the black almost immediately.”
No one may have a better appreciation for what their success means than the eight children Smith had with his wife, Janeel. “Before I started the store, I told them, ‘You are our retirement—we’re going to spend four weeks with each of you every year,” he cracked.
Just as Boomers made and changed markets for products throughout the past half-century, they’ll continue to flex their muscles well beyond retirement. Their spending is expected to decrease, as many downsize their homes and scale back on the kinds of purchases and outlays needed to raise families. But old habits, including spending patterns, die hard. And new products and services are still coming into vogue.
Guidant’s Nilsson, for example, says “we expect that the industry (for FOBS) will continue to grow 30 percent year-over-year. There is huge momentum behind this as the population in general continues to age.”
A decade ago, he said, few franchise professionals knew that the rollover industry existed. “Today, it’s nearly the No. 1 way a franchise is financed with total investment under $500,000,” he said. “Market awareness is the No. 1 barrier to growth, but the interest has certainly accelerated in the past two years.”
In a similar fashion, investment professionals say, companies catering to the needs of seniors can anticipate explosive growth if the product or service is right. And for-profit companies aren’t the only ones who can expect to see growth
Pam Seymour, executive director at the non-profit Shepherd’s Center Central, said the program for helping seniors age in place has already seen inquiries about home-sharing from seniors looking to either stretch their retirement income or find a way to help with the expenses of home ownership. This, from a program started 34 years ago to help students at Penn Valley find housing accommodations in the Midtown area.
“We had someone recently looking for a Golden Girls-type situation,” Seymour said, chuckling. “She said, ‘Here’s what I want: I have a house with three bedrooms, but I could use help with expenses around here. I want a couple of roommates, and to be like the Golden Girls on TV.”
The center didn’t take on that particular request, because it didn’t quite fit with program parameters. Still, Seymour said, “I would anticipate we’ll see more of that. I don’t think the program is widely known in the Kansas City area, but it’s available, and we match people looking for housing, so we’re trying to do a better job of marketing that. That could be a solution.”
Similarly, she said, more companies could form to address the kinds of every-day tasks that seniors can no longer accomplish on their own. Those opportunities are likely to emerge because the Boomers are a crowd known for bucking convention and asserting their independence—they will not go as gently into that good night, via an assisted-living center or nursing home, as did their parents.
“The last year or so, we’ve been working on getting back to our original roots, where we’re matching people with homes, not necessarily students, but it could be anybody in need of housing who would be willing to provide services to older adults with room in their homes,” Seymour said.
“And by services, I don’t mean bathing, or something like that, but more like changing light bulbs, taking out trash, even just providing companionship and a safety presence in the home. It may involve raking leaves or shoveling snow, but not rising to the level of home-health professionals.”